TESTIMONY OF
ARTHUR LEVITT, CHAIRMAN
U.S. SECURITIES AND EXCHANGE COMMISSION
EXECUTIVE SUMMARY
The Commission welcomes the introduction of S. 1815,
which adds momentum to similar securities legislation
currently under consideration in the House of Representatives.
Over the last decade, the U.S. securities markets have
dramatically increased in size. In addition, about 160
million Americans today -- over half the population -- own
stocks, either directly or through savings or retirement plans
that invest in stocks. The growth and transformation of the
U.S. securities markets challenge the Commission and Congress
to re-think the way that we regulate.
The Commission is committed to supporting regulatory
change in ways that maintain and improve the protection of
investors, and facilitate the formation of capital by U.S.
businesses. S. 1815 builds on initiatives that the Commission
has undertaken in recent years to: (1) simplify and improve
disclosure requirements; (2) promote capital formation;
(3) streamline and coordinate regulatory efforts; and
(4) promote the international competitiveness of the U.S.
securities markets.
S. 1815 would help to modernize the securities laws
through provisions that clarify the responsibilities shared by
federal and state regulators, and through significant
amendments to the Investment Company Act of 1940, the primary
statute governing mutual funds. The Commission supports the
thrust of these amendments, and recommends additional
provisions and modifications that would enhance its ability to
regulate the securities markets.
Allocation of Responsibility Between Federal and State
Regulators. S. 1815 would more clearly define the roles of
federal and state securities regulators, a goal that would
have seemed revolutionary only a year ago. In doing so, the
bill recognizes the key role that state regulators play in
prosecuting securities fraud and educating investors. At the
same time, however, the bill does not address issues --
namely, certain securities registration and broker-dealer
provisions -- that the Commission believes would be helpful to
address in the context of federal-state securities regulation.
The Commission supports the addition of such provisions, which
the attached testimony describes in greater detail.
Investment Company Act Amendments. The bill would also
help to modernize the Investment Company Act, a law that has
not been significantly revised for over 25 years. The
Commission has previously supported many of the changes
proposed in S. 1815, which include provisions on fund==========================================START OF PAGE 2======
advertising, deceptive fund names, and investment pools for
sophisticated investors. In addition, the Commission urges
that Congress adopt additional amendments to the Investment
Company Act to augment the Commission's authority concerning
recordkeeping and inspections, in order to improve the
Commission's oversight of the investment company industry.
The Commission hopes that the introduction of S. 1815
will serve to continue the dialogue that has begun on the
significant issues raised by this bill and by H.R. 3005, its
counterpart in the House of Representatives, and that these
efforts will culminate in the passage of legislation in this
Congress. The Commission stands ready to assist in these
efforts and to participate in the process of crafting
legislation that all may support.==========================================START OF PAGE ii======
SUMMARY OF COMMISSION RECOMMENDATIONS ON S. 1815
I. Title I -- Investment Advisers Integrity Act
Section 102 -- Funding for Enhanced Enforcement Priority.
Section 102 authorizes an appropriation of $16 million for the
enforcement of the Investment Advisers Act for each of fiscal
years 1997 and 1998. The Commission opposes this provision.
Section 103 -- Improved Supervision Through State and
Federal Cooperation. Section 103 calls for states to assume a
primary role with respect to investment advisers that are
small businesses. The Commission supports this provision.
Section 104 -- Interstate Cooperation. Section 104 would
limit state regulators to enforcing (1) books and records and
(2) financial responsibility laws of the "home" state of the
investment adviser to ensure uniformity. The Commission
recommends that the Committee consult with the states
regarding this provision.
Section 105 -- Disqualification of Convicted Felons.
Section 105 would allow the Commission to deny or withdraw the
registration of any person as an investment adviser who has
been convicted of a felony, and the registration of any
adviser with whom such person is associated. The Commission
supports this provision.
II. Title II -- Facilitating Investment in Mutual Funds
Section 202 -- Funds of Funds. Section 202 would amend
the Investment Company Act to address two types of
arrangements that involve investments by a registered
investment company in another registered investment company.
The Commission supports this provision.
Section 203 -- Flexible Registration of Securities.
Section 203 would amend the Investment Company Act to
implement a new system under which mutual funds and certain
other types of investment companies would pay registration
fees under the Securities Act. The Commission supports this
provision, with one reservation regarding its effective date.
Section 204 -- Facilitating the Use of Current
Information in Advertising. Section 204 would expressly
authorize the Commission to permit investment companies to use
a new type of "advertising" prospectus for purposes of the
Securities Act. The Commission supports this provision.
Section 205 -- Variable Insurance Contracts. Section 205
would amend the Investment Company Act, as it relates to the
regulation of variable insurance contracts, in order to==========================================START OF PAGE iii======
provide for different treatment between such contracts and
periodic payment plans. The Commission supports this
provision.
Section 206 -- Prohibition on Deceptive Investment
Company Names. Section 206 would amend the Investment Company
Act to grant the Commission rulemaking authority to define
investment company names, or the title of the securities they
issue, as materially deceptive or misleading. The Commission
supports this provision.
Section 207 -- Excepted Investment Companies. Section
207 would amend the Investment Company Act by creating a new
exception from the Act's regulation for investment funds
designed for financially sophisticated "qualified" investors.
The Commission generally supports this provision, with certain
reservations.
Section 208 -- Performance Fee Exemptions. Section 208
would amend the Investment Advisers Act to except investment
advisory contracts with qualified purchaser pools from the
Act's prohibition on performance fees, and authorize the
Commission to exempt from that prohibition investment advisory
contracts with sophisticated clients and clients that are not
U.S. residents. The Commission supports these provisions.
Title III -- Reducing the Cost of Saving and Investment
Section 301 -- Exemption for Economic, Business, and
Industrial Development Companies. Section 301 would create an
exemption under the Investment Company Act for a company whose
activities are limited to the promotion of economic, business,
or industrial development of enterprises doing business in the
state in which the company is organized. The Commission
supports this provision.
Section 302 -- Intrastate Closed-end Investment Company
Exemption. Section 302 would expand the Commission's
authority to exempt from Investment Company Act regulation
closed-end funds that publicly offer their securities solely
within a particular state, by increasing the aggregate
offering amount of securities that could be offered by these
companies from $100,000 to $10,000,000. The Commission
supports this provision.
Sections 303-307 -- Business Development Companies.
Sections 303 through 307 would amend certain portions of the
Investment Company Act that pertain to business development
companies. These amendments would provide business
development companies with more flexibility in a number of
respects. The Commission generally supports these provisions,
with certain reservations.==========================================START OF PAGE iv======
Section 308 -- Facilitating National Securities Markets.
Section 308 contains proposed amendments to the federal
securities laws that would preempt in specific circumstances
state requirements with respect to securities registration.
The Commission supports these securities registration
preemption provisions, with one request for clarification and
various technical comments.==========================================START OF PAGE v======
Section 309 -- Exemptive Authority. Section 309 would
amend the Securities Act and the Exchange Act to provide the
Commission with a grant of general exemptive authority under
those Acts. The Commission supports these provisions.
Section 310 -- Analysis of Economic Effects of
Regulation. Section 310 would authorize appropriations of $6
million for each of fiscal years 1997 and 1998 for the
Commission's Economic Analysis Program. It would also require
the Chief Economist of the Commission to prepare a report on
each rule proposed by the Commission. The Commission opposes
this provision.
Section 311 -- Privatization of EDGAR. Section 311 would
direct the Commission to submit a report to Congress within
180 days concerning Commission plans for promoting competition
and innovation of the EDGAR system through privatization of
all or any part of the system. The Commission supports this
provision, with minor amendments.
Section 312 -- Improving Coordination of Supervision.
Section 312 would require the Commission and the SROs for
broker-dealers to eliminate unnecessary duplication in the
examination process. The Commission supports this provision.
Section 313 -- Increased Access to Foreign Business
Information. Section 313 would address the status of offshore
press conferences and related materials under the Securities
Act and the Exchange Act. The Commission supports the
purposes of these provisions, but believes they should be
addressed through Commission rulemaking.
Section 314 -- Short-form Registration. Section 314
would require the Commission to amend the eligibility criteria
for short-form securities registration. The Commission
supports the concept of allowing non-voting common stock to be
included in determining short-form registration eligibility,
but believes this should be addressed through Commission
rulemaking.
Section 315 -- Church Employee Pension Plans. Section
315 would exempt from most federal securities regulation
church employee pension plans meeting the standards described
in section 414(e) of the Internal Revenue Code of 1986. The
Commission generally supports the exemption for church plans
and their related persons, but has certain reservations.
Section 316 -- Promoting Global Preeminence of American
Securities Markets. Section 316 expresses the sense of the
Congress concerning the importance of establishing a
comprehensive set of generally accepted international
accounting standards that could be used in such offerings. ==========================================START OF PAGE vi======
The Commission agrees with the sense of Congress on this point
and is prepared to submit the specified progress report.==========================================START OF PAGE 1======
TESTIMONY OF
ARTHUR LEVITT, CHAIRMAN
U.S. SECURITIES AND EXCHANGE COMMISSION
CONCERNING S. 1815,
THE "SECURITIES INVESTMENT PROMOTION ACT OF 1996"
BEFORE THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
June 5, 1996
Chairman D'Amato and Members of the Committee: I
appreciate this opportunity to testify on behalf of the
Securities and Exchange Commission ("Commission" or "SEC")
regarding S. 1815, the "Securities Investment Promotion Act of
1996."
Let me begin by congratulating Chairmen D'Amato and Gramm
for introducing S. 1815, as well as the other co-sponsors of
the bill, Senators Dodd, Bryan and Moseley-Braun. S. 1815
contains significant provisions that would more clearly define
the partnership of shared responsibilities between federal and
state securities regulators. Only a year ago, these changes
would have been viewed as revolutionary. The transformation
of the debate is a testament to the broad, bipartisan support
for dramatic legislative changes in this Congress that would
benefit investors, industry and government alike. The bill
would also help to modernize the 56-year old Investment
Company Act, a law that has not been substantially changed
since 1970, in ways that the Commission has supported in the
past.==========================================START OF PAGE 2======
S. 1815 adds momentum to similar legislation currently
under consideration in the House of Representatives. Although
the Commission has endorsed H.R. 3005 and can support many of
the parallel provisions contained in S. 1815, there are a few
provisions in this bill that the Commission would prefer be
omitted. At the same time, S. 1815 contains additional
provisions that would enhance the effectiveness of H.R. 3005
if they were added to that bill. The Commission hopes that
the introduction of S. 1815 will serve to continue the
important dialogue that has begun on the significant issues
raised by these bills, and that these efforts will culminate
in the passage of legislation in this Congress. The SEC
stands ready to assist in these efforts and to participate in
the process of crafting legislation that we all may support.
This statement discusses some of the more salient issues
raised by S. 1815 within the context of recent developments in
the securities industry and its regulation. An appendix
attached to this statement analyzes the specific provisions of
S. 1815 in detail and discusses the Commission's views on each
of those provisions. I. Introduction
The U.S. securities markets play a dual role in the
American economy. First, securities markets provide investors
a means to invest money for retirement, save money for college
education and earn money by participating in the growth of==========================================START OF PAGE 3======
U.S. and foreign businesses. Today, about 160 million
Americans -- over half the population -- own stocks, either
directly or through savings or retirement plans that invest in
stocks. Second, the money provided by investors gives
businesses -- both small and large -- access to capital that
is the lifeblood of corporate operations and expansion.
Today, the U.S. securities markets serve the needs of almost
13,000 public companies,[[1]] raising capital to support
new industries, finance operations, create jobs, fund research
and development, and support growth for the future. In 1995
alone, some $900 billion worth of securities were sold in our
markets.
S. 1815 has been introduced in a period of phenomenal
performance in the securities markets. Between 1980 and 1995,
for example, the value of public offerings (including debt and
equity, but not investment company securities) increased more
than ten-fold, from $58 billion to $768 billion. Between 1990
and 1995, the dollar volume of equities traded on U.S.
securities exchanges and NASDAQ grew 182%, with over $5.94
trillion traded in 1995. Volume continues to explode.
December 15, 1995 was the heaviest trading day in the history
of the New York Stock Exchange, with over 636 million shares
trading hands. Last month, the Dow Jones Industrial Average,
viewed in its 100 years by many around the world as the
primary barometer of the stock market, reached record highs.
On NASDAQ, record daily volume was set on May 7, 1996,==========================================START OF PAGE 4======
exceeding 806 million shares. Over the last few months, the
share volume on all U.S. markets combined has generally
exceeded one billion shares each day.
Dramatic growth also has occurred in the mutual fund and
investment adviser sectors of the securities industry. In
1970, investors could choose from among 361 mutual funds.
Today, over 5,500 mutual funds (almost twice the number of
stocks trading on the New York and American Stock Exchanges)
and over 500 closed-end funds are available to investors.
Mutual funds, which in 1970 held approximately $48 billion in
assets, now hold over $3 trillion in assets. Similarly, the
number of investment advisers registered with the Commission
has swelled to 22,500. The assets they manage have also
increased: since 1980, assets managed by registered
investment advisers (excluding assets of registered investment
companies) have risen from $205 billion to almost $8 trillion,
an increase of over 3,600%.
The dramatic growth and transformation of the U.S.
securities markets present new challenges for regulators and
Congress. Today the U.S. securities markets are widely
regarded as the deepest, most liquid and fairest markets in
the world. But just as the need to constantly update, revise
and innovate products and services in order to remain
competitive is the driving force behind American enterprise,
the crucial task for federal and state regulators is to revise
and re-think the way that we as regulators do business -- so==========================================START OF PAGE 5======
that U.S. businesses may maintain their competitive edge in a
changing world economy. Businesses compete best in an arena
where the rules promote honesty, intelligence and hard work,
and the securities markets are no exception. Accordingly,
investor protection and market integrity need to be the
touchstones in this important effort to effect dramatic,
meaningful changes in securities regulations, an effort that
S. 1815 admirably undertakes to accomplish. II. Recent
Commission Achievements and Ongoing Initiatives:
Selected Highlights
The provisions of S. 1815 build on initiatives that the
Commission has undertaken in the recent past. Over the past
two years, the Commission has attempted to design new means to
promote the efficiency and fairness of the U.S. securities
markets, with minimal regulatory burden. A sampling of these
initiatives includes the following:
Simplification and Improvement of Disclosure Requirements
ù The SEC has worked with the investment company
industry and state securities regulators to develop
a "fund profile," a standardized, short-form summary
of a fund's full prospectus. The profile is
designed to be more understandable to investors, and
initial investor reaction has been very positive.
In a related area, a similar profile program for
variable annuities was announced yesterday.
ù Last July, the Commission proposed improved
disclosure requirements for money market funds to
simplify money market fund prospectuses, making them
less costly to prepare and more understandable to
investors.
ù In the area of derivatives, the Commission late last
year proposed rule amendments that are designed to==========================================START OF PAGE 6======
help investors assess the market risks of
derivatives investments by public companies.
ù The Commission is facilitating public access to
corporate filings on the Commission's Electronic
Data Gathering, Analysis and Retrieval ("EDGAR")
system, and reevaluating and updating EDGAR to take
advantage of new technology. The Commission has
also approved the issuance of two interpretive
releases designed to encourage issuers to use
electronic media to provide prospectuses and other
disclosure documents to investors, and to allow
broker-dealers, investment advisers and transfer
agents to deliver information to their customers and
clients.
Promotion of Capital Formation
ù In March 1996, an internal Commission Task Force on
Disclosure Simplification released a report
proposing revisions to modernize and streamline the
regulatory framework that governs corporate finance
and accounting. The report recommends the
elimination of 81 rules and 22 forms and schedules,
as well as the modification of dozens of other
rules, forms and schedules, related to corporate
finance. The Commission has acted on many of the
proposals already and expects to take further action
soon.
ù The Advisory Committee on the Capital Formation and
Regulatory Processes, headed by Commissioner Steven
Wallman, is expected shortly to recommend further
reforms of the registration and disclosure process -
- perhaps including a shift from a securities
registration system to a company registration
system.
Streamlining and Coordination of Regulatory Efforts
ù The SEC has eliminated the need for prior review of
certain rule filings by self-regulatory
organizations ("SROs") such as the NASD and
securities exchanges.
ù The Commission has reallocated existing resources to
establish a new Office of Compliance Inspections and
Examinations to conduct and coordinate examinations
of brokers, dealers, securities exchanges,
investment companies and advisers, and transfer
agents.==========================================START OF PAGE 7======
ù The Commission has entered into a memorandum of
understanding with state securities regulators and
SROs to share information, coordinate examinations,
create a computerized tracking system, and hold
regular planning summits.
Promotion of the International Competitiveness of U.S.
Securities Markets
ù The Commission has streamlined the registration,
reporting and reconciliation requirements for
foreign companies.
ù The SEC has permitted, in cross-border offerings,
the use of certain international accounting
standards in portions of financial statements filed
with the Commission.
ù The Commission has actively supported, through the
International Organization of Securities Commissions
("IOSCO"), the efforts of the International
Accounting Standards Committee to develop high
quality, comprehensive international accounting
standards.
These initiatives are but a sample of the Commission's
efforts to reduce regulatory burdens. At the same time, the
Commission is aware that as an administrative agency, it must
operate within the boundaries set by the securities laws.
Accordingly, it welcomes efforts, such as those contained in
S. 1815, that would provide the SEC with the tools to respond
more flexibly to a changing market environment. It is in this
context that the Commission turns, below, to a discussion of
some of the most salient issues raised by S. 1815. III.
Significant Issues Raised by S. 1815
A. Rethinking the Federal-State Regulatory Partnership
Overview. Several provisions of S. 1815 would amend the
federal securities laws to preempt state requirements in the==========================================START OF PAGE 8======
areas of investment adviser regulation and the registration of
specified securities offerings, including offerings by
investment companies and offerings of nationally listed
securities. The bill does not, however, preempt state
regulation in the broker-dealer area.
The current system of dual federal-state regulation is
not the system that Congress -- or the Commission -- would
create today if we were designing a new system. While
securities markets today are global, issuers and securities
firms still must register many securities offerings in 52
separate jurisdictions; satisfy a multitude of separate books
and records requirements; and bear the substantial costs of
compliance with the overlapping requirements. The current
scheme of federal-state regulation is particularly onerous for
investment companies, which are extensively regulated by the
Commission, and whose business is fundamentally national in
nature.
At the same time, however, state securities authorities
play an essential role in the regulation of the U.S.
securities industry. State regulators are often the front
line of defense against developing problems; they are the
"local cops" on the beat who can quickly detect and respond to
violations of law. Further, the states have been aggressive
in seeking to publicize instances of possible fraud and abuse
as a means of better educating investors.==========================================START OF PAGE 9======
It appears that an appropriate balance can be attained in
the federal-state arena that better allocates
responsibilities, reduces compliance costs and facilitates
capital formation, while continuing to provide for the
protection of investors. The bill's approach to the division
of responsibilities in the investment adviser and investment
company areas exemplifies such a balance.
Additional Amendments Suggested for S. 1815. The
Commission has endorsed H.R. 3005, which would preempt state
law requirements, particularly in the areas of securities
registration and broker-dealer regulation, that are not
preempted in S. 1815. These other provisions also achieve the
goals of regulatory simplification and protecting investors.
While S. 1815 takes important steps in the right direction, a
combination of the approaches in S. 1815 and H.R. 3005 would
provide a more comprehensive rationalization of our federal-
state system.
Securities Registration. S. 1815 includes
significant securities preemption provisions with respect to
investment companies, and would codify existing state law
exemptions for issuers whose securities are "nationally
traded," that is, listed on the New York Stock Exchange,
American Stock Exchange, or on the NASDAQ National Market
System. However, other securities preemption provisions could
be included that would enhance the utility of the securities
preemption provisions without sacrificing investor protection.
==========================================START OF PAGE 10======
For example, H.R. 3005 provides relief for smaller businesses
that are not "nationally traded" by preempting federally
registered offerings by companies that have two years of
audited financial statements and at least $10 million in
assets.
H.R. 3005 also provides helpful simplification by
preempting state regulation of secondary market trading
transactions, and of certain exempted securities (such as
commercial paper) and municipal securities (except in the
state where issued). Most of these transactions already are
exempt in the states through differing formulations;
codification of the exemptions could reduce "blue sky"
expenses considerably.
The Commission supports these provisions and believes it
would be worthwhile for the Committee to consider each of
these provisions as possible additions to S. 1815.
Broker-Dealers. S. 1815 would not preempt state
involvement in broker-dealer regulation. The Commission has
supported a number of limited provisions in this area
contained in H.R. 3005, which are worthy of the Committee's
consideration.
As a general matter, the Commission recognizes that state
regulators have a compelling interest in determining who may
do business within their borders, and in how such business is
conducted. The Commission also recognizes, however, that
businesses trying to compete in today's changing financial==========================================START OF PAGE 11======
world are hindered by the potentially conflicting requirements
of 52 jurisdictions, and that, for this reason, securities
firms have a compelling interest in a centralized and
predictable regulatory system.
Balancing these two concerns, the Commission believes
that states should continue to license broker-dealers that do
business within their respective jurisdictions, and to receive
fees for licensing such broker-dealers. States already have
begun to create greater uniformity by developing a central
registration depository system for broker-dealer registration.
The Commission also believes, however, that states should not
impose books and records and capital requirements that exceed
applicable SEC and SRO standards. H.R. 3005 would preempt
state laws that impose books and records requirements, as well
as financial responsibility and reporting requirements, that
are inconsistent with or that exceed requirements established
under the Exchange Act. The Commission supports state
preemption in this area.
Broker-Dealer Margin. In a related area, S. 1815
does not include amendments that appear in H.R. 3005
concerning margin requirements for broker-dealers. The
Commission and representatives from the securities industry
recommended these provisions, which would remove legislative
restrictions on the sources from which broker-dealers may
obtain financing. These provisions also would exempt from the
Federal Reserve Board's margin requirements the extension,==========================================START OF PAGE 12======
maintenance or arrangement of credit for a broker-dealer or a
member of a national securities exchange if (1) a substantial
portion of the broker-dealer's or exchange member's business
consists of transactions with persons other than broker-
dealers or (2) such credit is used to finance the broker-
dealer's or exchange member's securities activities as a
market maker or underwriter. The Commission supports these
margin changes.
B. Issues Raised by Amendments to the Investment
Company Act
Overview. A substantial portion of S. 1815 would effect
important changes to the Investment Company Act of 1940, the
primary statute that governs mutual funds and other pooled
investment vehicles. Many of these changes were proposed in
the Commission staff study on the Investment Company
Act.[[2]] These changes in the Investment Company Act
are proposed at an appropriate time -- over a quarter of a
century has passed since the Act was last significantly
revised by the Congress. The changes in the investment
company industry since 1970 have been dramatic. Nearly one-
third of all U.S. households own investment company shares, a
fact that attests to the enormous significance of the industry
to our country's economy and its citizens. The trust in
investment companies is based in no small part on the strong
framework for investment company regulation provided by the
Investment Company Act, a law which the fund industry's==========================================START OF PAGE 13======
leading trade association has termed "a model of effective
legislation."[[3]]
S. 1815 would improve, and help bring into the 21st
century, many aspects of investment company operation and
regulation. The bill would accomplish the following
objectives:
ù allow the Commission to make its advertising rules
more flexible;
ù authorize the Commission to adopt rules to address
deceptive and misleading fund names;
ù make more flexible the Investment Company Act's
provisions concerning "funds of funds" and certain
types of insurance products that are regulated as
investment companies;
ù improve the system under which mutual funds pay
their registration fees under the Securities Act;
ù simplify the existing exception from Investment
Company Act regulation for "private" investment
companies with no more than 100 investors;
ù create a new exception for investment pools whose
only shareholders are highly sophisticated
investors; and
ù create greater flexibility for investment companies
that invest primarily in small businesses.
Additional Amendments Suggested for S. 1815. While the
Commission supports the changes proposed in S. 1815, the
Commission also believes that further changes to the
Investment Company Act are needed in order to improve the
Commission's oversight of the investment company industry.
H.R. 3005 contains additional amendments to the Investment
Company Act that would provide the Commission the tools it
needs to function effectively in today's complex market==========================================START OF PAGE 14======
environment. The Commission urges that these provisions --
which include increased authority with respect to
recordkeeping, inspections, and shareholder reports -- be
included in S. 1815.[[4]]
Recordkeeping and Inspections. The fund industry
and the Commission agree that the success of the investment
company industry depends greatly on public trust, and also
agree that public trust is furthered by an effective
Commission inspections program.[[5]] The continued
success of this program depends on the Commission's access to
all documents needed to determine whether funds are meeting
regulatory requirements. The Commission's existing statutory
basis for fund recordkeeping and inspections, however, is
relatively narrow. The Investment Company Act currently
permits the Commission to inspect records that funds are
required to maintain by Commission rule.[[6]] The Act,
in turn, limits the Commission's rulemaking authority to
records that relate to the fund's financial
statements.[[7]] Although most funds voluntarily provide
all materials that the Commission staff requests, voluntarism
is no basis for effective oversight.
H.R. 3005 contains provisions that would enable the
Commission to specify, by rule, the information that must be
reflected in investment company records.[[8]] This
approach would strengthen the inspections program and elevate
it to the standards that currently apply to inspections of==========================================START OF PAGE 15======
broker-dealers and investment advisers.[[9]] The
Commission could use this rulemaking authority to facilitate
examinations of fund transactions that present novel investor
protection issues. For example, the use of derivative
investments, which often involves complex strategies, can only
be understood by reviewing records unrelated to the financial
statements. A complementary provision would clarify the
Commission's authority to receive more frequent reports about
material events concerning an investment company (such as a
change in control).[[10]] This provision would enable
the Commission, upon learning of such events, to take
appropriate action, if necessary, to protect and preserve fund
assets.
Shareholder Reports. Finally, H.R. 3005 would
broaden the Commission's authority to prescribe the content of
semi-annual reports to fund shareholders.[[11]] With
this augmented authority, the Commission would be able to
require that such reports contain certain important
information, such as a fund's investment activities underlying
its recent performance results.[[12]] This information
may also help reduce the length and complexity of fund
prospectuses. The Commission supports this enhanced
authority.
* * *
Collectively, these provisions could significantly
improve investment company regulation. They are particularly==========================================START OF PAGE 16======
important to the Commission's ability, in the face of limited
resources, to oversee a growing industry. In addition, these
provisions reflect the Commission's sensitivity to imposing
unnecessary burdens on investment companies, as well as its
recognition that investment company internal compliance
programs can operate most effectively in an atmosphere that
promotes candor. These provisions would complement the other
Investment Company Act amendments of S. 1815 discussed in the
attached appendix. IV. Conclusion
The Commission is pleased that S. 1815 continues the
dialogue to develop securities legislation that would update
and modernize the laws that govern this nation's vibrant
securities industry. The Commission takes very seriously the
directive to "reinvent" government, and it has already begun
to take important steps to reduce bureaucracy, streamline
regulatory requirements and eliminate regulatory burdens.
The Commission strongly supports the thrust of S. 1815
and its counterpart bill in the House of Representatives,
H.R. 3005. The Commission also appreciates the provisions of
S. 1815 that break new ground in improving securities
regulation. As this Congress draws to a close, it is
constructive to focus efforts on achieving legislation this
session that largely achieves results we all identify as
important. The Commission is enthusiastic about working with==========================================START OF PAGE 17======
the Committee, as well as other interested parties, on the
many significant issues raised by these bills. Our success
will be measured by the efforts we share to enhance capital
formation, while preserving the investor protections that are
so crucial to our financial markets.==========================================START OF PAGE 18======
ENDNOTES
[[1]] This figure does not include the roughly 5,000
registered investment companies (representing over
23,000 separate portfolios) that also raise capital
in the U.S. markets.
[[2]] See U.S. SECURITIES AND EXCHANGE COMMISSION,
DIVISION OF INVESTMENT MANAGEMENT, PROTECTING
INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY
REGULATION (May 1992).
[[3]] Oversight Hearings on the Mutual Fund Industry:
Hearings Before the Subcomm. on Securities of the
Senate Comm. on Banking, Housing, and Urban Affairs,
103d Cong., 1st Sess. 94 (1993) (prepared statement
of Matthew P. Fink, President, Investment Company
Institute).
[[4]] In his floor statement on S. 1815, Senator Bryan
characterized these sections as "key provisions" of
H.R. 3005. 142 CONG. REC. S5598 (daily ed. May 23,
1996).
[[5]] See, e.g., Mutual Fund Industry: Hearings Before the
Subcomm. on Telecommunications and Finance of the
House Comm. on Energy and Commerce, 103d Cong., 1st
Sess. 99-100 (July 22, 1993) (statement of Matthew
P. Fink, President, Investment Company Institute).
[[6]] Investment Company Act section 31(b), 15 U.S.C.
80a-30(b).
[[7]] Investment Company Act section 31(a), 15 U.S.C.
80a-30(a); Investment Company Act rule 31a-1, 17 CFR
270.31a-1.
[[8]] Section 207 of H.R. 3005 (amending Investment
Company Act section 31(a), 15 U.S.C. 80a-30(a), to
require investment companies to keep such records as
the Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors). H.R. 3005 also would
amend section 31(b) of the Investment Company Act to
allow examiners to obtain copies of fund records
without seeking a formal order.
[[9]] See Securities Exchange Act sections 17(a) and (b),
15 U.S.C. 78q(a)-(b) (requiring broker-dealers to
produce such records as the Commission may prescribe
by rule); Investment Advisers Act section 204, 15==========================================START OF PAGE 19======
U.S.C. 80b-4 (imposing a similar requirement on
investment advisers).
[[10]] Section 206 of H.R. 3005 (amending Investment
Company Act section 30(b), 15 U.S.C. 80a-29(b)).
[[11]] Section 206 of H.R. 3005 (amending Investment
Company Act section 30(d), 15 U.S.C. 80a-29(d),
which currently limits the Commission's authority to
prescribing the content of financial statements
contained in annual reports).
[[12]] Such rulemaking would be particularly beneficial for
the shareholders of closed-end funds who, unlike
their mutual fund counterparts, receive updates on
fund activities only in the form of annual reports.